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Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
Step 3: Calculation of No. of shares required to be issued for balance funds
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
Step 4: Calculation of value of firm
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
<!-- formul... | [
0.05227309465408325,
0.020823093131184578,
0.014047017320990562,
0.01345890387892723,
-0.01511260587722063,
-0.027143681421875954,
0.03009260818362236,
0.00581427151337266,
-0.011929886415600777,
0.06333133578300476,
0.04646887630224228,
0.019397150725126266,
0.024344440549612045,
-0.00501... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Step 2: Calculation of funds required for investment
| Earning | ` 1,00,000 |
|-------------------------------|------------------------------------|
| Dividend distributed | ` 50,000 |
| Fund available for investment ... | [
0.022320976480841637,
0.023247024044394493,
-0.005318398121744394,
0.0054063741117715836,
0.005982907488942146,
-0.011543992906808853,
0.005128498189151287,
0.0031594233587384224,
-0.010932833887636662,
0.058110564947128296,
0.03155965730547905,
0.03023284114897251,
0.025407571345567703,
-... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Assumptions of Walter's Model
Walter's approach is based on the following assumptions:
- All investment proposals of the firm are to be financed through retained earnings only.
- 'r' rate of return & 'Ke' cost of capital are constant.
- Perfect capital markets : The firm operates in ... | [
0.01154277566820383,
0.02584325708448887,
0.019451919943094254,
-0.03303249552845955,
0.01684086211025715,
-0.008321407251060009,
0.01866239123046398,
0.00475707370787859,
-0.029935501515865326,
0.09415541589260101,
0.021716859191656113,
0.010089438408613205,
0.03903748095035553,
-0.045303... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
- No floatation or transaction cost : Similarly, these costs may differ country to country or market to market.
- The firm has perpetual life
The relationship between dividend and share price based on Walter's formula is shown below:
<!-- formula-not-decoded --> | [
0.017726127058267593,
0.04327062517404556,
-0.005350895691663027,
-0.008594302460551262,
0.009479298256337643,
0.006097973790019751,
0.05761390179395676,
0.006338088307529688,
-0.00409884424880147,
0.04978208988904953,
0.03795287013053894,
0.019126497209072113,
0.015619653277099133,
-0.007... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## DIVIDEND DECISIONS
of shares of certain companies which pay higher dividends and retain very low profits is also high.
As explained above, market price is dependent upon two factors; firstly, the quantum of dividend and secondly, profitable opportunities available t... | [
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0.004254903644323349,
-0.012783312238752842,
-0.004346087574958801,
-0.008756358176469803,
-0.02645166777074337,
0.006475126836448908,
0.015671949833631516,
-0.02254978008568287,
0.033559419214725494,
0.007611527107656002,
0.05343002825975418,
0.03790426626801491,
... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## IRR, Ke and optimum payout
As we know that Walter's approach considers two factors, following can be concluded from this model:
is
| Company | Condition of r vs K e | Correlation between Size of Dividend and Market Price of share | Optimum dividend payout ratio |
|-----------|... | [
0.03919748589396477,
0.034769296646118164,
0.016450852155685425,
-0.013599447906017303,
-0.009724839590489864,
-0.029042702168226242,
0.013666613027453423,
0.015037019737064838,
-0.040680862963199615,
0.047594934701919556,
0.012560136616230011,
0.0284412894397974,
0.023949336260557175,
-0.... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Advantages of Walter's Model
1. The formula is simple to understand and easy to compute.
2. It can envisage different possible market prices in different situations and considers internal rate of return, market capitalisation rate and dividend payout ratio in the determination of market ... | [
0.018146993592381477,
0.03254580870270729,
0.013676567003130913,
-0.037002138793468475,
-0.0027738523203879595,
0.005600907374173403,
0.04915846139192581,
0.022236227989196777,
0.004295556806027889,
0.09185287356376648,
0.04010554030537605,
0.009595716372132301,
0.033465221524238586,
-0.03... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Limitations of Walter's Model
1. The formula does not consider all the factors affecting dividend policy and share prices. Moreover, determination of market capitalisation rate is difficult.
2. Further, the formula ignores such factors as taxation, various legal and contractual obligatio... | [
0.029193220660090446,
-0.00011337353498674929,
0.014842452481389046,
-0.0017537908861413598,
0.027981558814644814,
0.00715995067730546,
0.03801525756716728,
0.019789043813943863,
-0.01088623981922865,
0.08775123208761215,
0.029516899958252907,
0.008308672346174717,
0.050089281052351,
-0.01... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
Since r > Ke , the optimum dividend pay-out ratio would 'Zero' (i.e. D = 0),
Accordingly, value of a share:
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
The optimality of the above payout ratio can be proved by using 25%, 50%, 75% and 100%... | [
0.03892005234956741,
0.029944855719804764,
0.032554998993873596,
0.014091528952121735,
-0.012718381360173225,
-0.027080709114670753,
0.043122872710227966,
0.01329075824469328,
-0.04700471833348274,
0.06330472975969315,
0.022507328540086746,
0.03574557974934578,
0.015796182677149773,
0.0488... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 3
The following figures are collected from the annual report of XYZ Ltd.:
| Net Profit | ` 30 lakhs |
|-----------------------------------|--------------|
| Outstanding 12% preference shares | ` 100 lakhs |
| No. of equity shares | 3 lakhs ... | [
0.02942194789648056,
0.020860575139522552,
0.010219371877610683,
-0.03393518552184105,
0.009422673843801022,
-0.03546541556715965,
0.023442387580871582,
0.01914818584918976,
-0.006615035235881805,
0.06548125296831131,
0.021123945713043213,
0.03232675418257713,
0.028234275057911873,
-0.0145... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
| | ` in lakhs |
|---------------------------------|---------------|
| Net Profit | 30 |
| Less: Preference dividend | 12 |
| Earning for equity shareholders | 18 |
| Earning per share ... | [
0.027206823229789734,
0.03261195123195648,
-0.014065184630453587,
0.006133227609097958,
-0.020785963162779808,
-0.0169807318598032,
0.01888657547533512,
0.013041147962212563,
-0.012535344809293747,
0.04435667395591736,
0.024343587458133698,
0.0544423907995224,
0.027395687997341156,
-0.0064... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Assumptions of Gordon's Model
This model is based on the following assumptions:
- Firm is an all equity firm i.e. no debt.
- IRR will remain constant , because change in IRR will change the growth rate and consequently the value will be affected. Hence this assumption is necessary.
- Ke... | [
0.029582366347312927,
0.012019826099276543,
0.011409039609134197,
-0.019617527723312378,
0.017918892204761505,
-0.0223865769803524,
0.028232567012310028,
0.014173761010169983,
-0.019826730713248253,
0.07134327292442322,
0.042472515255212784,
0.004483768716454506,
0.021606875583529472,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 4
The following figures are collected from the annual report of XYZ Ltd.:
| Net Profit | ` 30 lakhs |
|-----------------------------------|--------------|
| Outstanding 12% preference shares | ` 100 lakhs |
| No. of equity shares | 3 lakhs ... | [
0.008252114988863468,
0.02584429457783699,
0.004390664864331484,
-0.02208332158625126,
0.00576272327452898,
-0.04184260964393616,
0.04638043791055679,
0.02613583207130432,
-0.010169964283704758,
0.04505468159914017,
0.018880274146795273,
0.04213588312268257,
0.02734711579978466,
-0.0038682... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
| | ` in lakhs |
|---------------------------------|---------------|
| Net Profit | 30 |
| Less: Preference dividend | 12 |
| Earning for equity shareholders | 18 |
| Earning per share ... | [
0.02228444814682007,
0.028652656823396683,
-0.012245651334524155,
0.009730893187224865,
-0.011149988509714603,
-0.03421894460916519,
0.03326224535703659,
0.013023458421230316,
-0.023023219779133797,
0.04938041418790817,
0.03552994504570961,
0.043458037078380585,
0.03317264840006828,
-0.030... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## The 'Bird-in-hand theory' - Gordon's Revised Model
Myron Gordon revised his dividend model and considered the risk and uncertainty in his model. The Bird-in-hand theory of Gordon has two arguments:
- (i) Investors are risk averse and
- (ii) Investors put a premium on certain return and discount o... | [
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0.018732262775301933,
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0.025330500677227974,
-0.015406553633511066,
0.012480360455811024,
0.026870176196098328,
-0.0054869200102984905,
0.06902551651000977,
0.03748117387294769,
0.003634314052760601,
0.02945796400308609,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## DIVIDEND DECISIONS
The relationship between dividend and share price on the basis of Gordon's formula is shown as:
<!-- formula-not-decoded -->
Where,
P0
= Market price per share (ex-dividend)
Do
= Current year dividend
g
= Constant annual growth rate of dividends
Ke
= Cost of equity cap... | [
-0.010345710441470146,
0.03799009323120117,
0.0342300608754158,
-0.01123470813035965,
0.017459619790315628,
-0.020507458597421646,
0.03560013696551323,
0.015088072046637535,
-0.0139252208173275,
0.055482178926467896,
0.009835385717451572,
0.034142520278692245,
0.02079341933131218,
-0.00151... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Dividend Discount Model (DDM)
It is a financial model that values shares at the discounted value of the future dividend payments. Under this model, the price of a share that will be traded is calculated by the PV of all expected future dividend payment discounted by an appropriate ri... | [
-0.013857017271220684,
-0.001487672794610262,
-0.011884038336575031,
-0.006438128184527159,
0.011376900598406792,
-0.005022706463932991,
0.030479032546281815,
-0.037505291402339935,
-0.007558357901871204,
0.07521715015172958,
-0.017565589398145676,
0.0128615852445364,
0.03899986669421196,
... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Intrinsic value = Sum of PV of future cash flows
Intrinsic value = Sum of PV of Dividends + PV of Stock Sale Price
<!-- formula-not-decoded -->
In the above equation, it is assumed that dividend is paid at the end of each year and that the stock is sold at the end of the nth year.
Where
P = Ma... | [
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0.05609874799847603,
0.002285344759002328,
0.016494477167725563,
0.013617618009448051,
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0.03729468211531639,
0.0008047222509048879,
0.011901828460395336,
0.04964800551533699,
0.008928215131163597,
0.04679437354207039,
0.034866273403167725,
0.0158... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
There can three possible situations:
<!-- image -->
- (a) Zero Growth Rate : assumes all dividend paid by a stock remains same. In this case the stock price would be equal to:
<!-- formula-not-decoded -->
Where,
D = Annual dividend
Ke = Cost of capital
P0 = Current Ma... | [
0.018332207575440407,
0.02459409274160862,
0.015851644799113274,
0.004846162628382444,
0.0013949801214039326,
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0.04439473897218704,
0.02081880159676075,
-0.014201424084603786,
0.07259465754032135,
0.035781122744083405,
0.027227211743593216,
0.04748276248574257,
0.00978... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
<!-- formula-not-decoded -->
- (b) Constant Growth Rate (Gordon's Growth Model): The relationship between dividend and share price on the basis of Gordon's formula is:
<!-- formula-not-decoded -->
g = growth rate of dividends
Ke = cost of equity capital/ expected rate of return | [
0.019785309210419655,
0.03315155208110809,
0.02254953794181347,
0.011493938975036144,
0.013537964783608913,
-0.023183703422546387,
0.03937752544879913,
0.020962724462151527,
-0.015852676704525948,
0.05626678094267845,
0.02038322575390339,
0.026544373482465744,
0.020788514986634254,
-0.0253... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 6
XYZ is a company having share capital of ` 10 lakhs of ` 10 each. It distributed current dividend of 20% per annum. Annual growth rate in dividend expected is 2%. The expected rate of return on its equity capital is 15%. CALCULATE price of share applying Gordon's growth... | [
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0.03943553566932678,
0.02407584711909294,
-0.03840351104736328,
0.012210420332849026,
-0.03716030716896057,
0.04518197849392891,
0.021643396466970444,
0.006115090101957321,
0.06635022163391113,
0.019011400640010834,
0.03472750633955002,
0.006606772541999817,
0.0075573... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
- (c) Variable Growth Rate : Variable-growth rate models (multi-stage growth models) can take many forms, even assuming the growth rate is different for every year. However, the most common form is one that assumes 3 diff... | [
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0.032097578048706055,
0.03562305122613907,
0.007535240147262812,
-0.004757551942020655,
-0.0010363960172981024,
0.034363605082035065,
0.042163025587797165,
-0.0032009221613407135,
0.061895277351140976,
0.021800801157951355,
-0.00347069907002151,
0.01567714475095272,
-... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 7
A firm had paid dividend at ` 2 per share last year. The estimated growth of the dividends from the company is estimated to be 5% p.a. DETERMINE the estimated market price of the equity share if the estimated growth rate of dividends (i) rises to 8%, and (ii) falls to 3%. Also FIND ... | [
0.012840775772929192,
0.03629423305392265,
0.0020175569225102663,
-0.016731154173612595,
0.006441091652959585,
-0.029182495549321175,
0.011172635480761528,
0.016735989600419998,
0.017465177923440933,
0.05282379686832428,
0.01658621057868004,
0.01742692105472088,
0.01836692914366722,
0.0306... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
In the present situation, the current MPS is as follows:
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
- (i) The impact of changes in growth rate to 8% on MPS will be as follows:
<!-- formula-not-decoded -->
- (ii) The impact of changes in growth rate to 3% on MPS will be... | [
0.0025857517030090094,
0.029082922264933586,
0.018379487097263336,
0.00713098980486393,
-0.004955776501446962,
-0.020831409841775894,
0.0009180979686789215,
0.03100808896124363,
-0.00813851784914732,
0.0637039840221405,
0.015274549834430218,
0.03454994782805443,
0.01681772992014885,
0.0174... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Limitations of Gordon's Model
1. The dividend discount model depends on projections about company growth rate and future capitalization rates of the remaining cash flows, which may be difficult to calculate accurately.
2. The true intrinsic value of a stock is difficult to determine realistically. | [
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0.017282774671912193,
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0.02576630935072899,
0.011077781207859516,
-0.005627429578453302,
0.06467203795909882,
0.01085696555674076,
-0.009097970090806484,
0.04217253997921944,
-... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Important considerations for Gordon's Model
1. With dividends growing at constant rate of g, the share price also grows at g.
<!-- formula-not-decoded -->
Multiplying both sides by (1+g) gives as follows:
<!-- formula-not-decoded -->
P1 = D2/(r-g)
So both dividend and price have grown at the ... | [
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0.016169387847185135,
0.032477475702762604,
-0.0019459588220342994,
0.022897938266396523,
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0.039704762399196625,
0.021813223138451576,
-0.008207948878407478,
0.06253109872341156,
0.027588142082095146,
0.027415387332439423,
0.02546876110136509,
-0.... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 9.1 Meaning of Stock Split
Stock split means splitting one share into many, say, one share of ` 500 into 5 shares of ` 100. Stock splits is a tool used by the companies to regulate the prices of shares i.e. if a share price increases beyond a limit, it may become less tradable, for e.g. suppose a... | [
0.025167623534798622,
0.027520697563886642,
0.0003829486377071589,
0.03894307464361191,
0.012777339667081833,
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0.05183875560760498,
-0.01590641774237156,
0.02445843815803528,
0.09473339468240738,
0.04509291425347328,
0.038275063037872314,
-0.0076621356420218945,
-0.017... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 10.1 Meaning of Share Buyback
Share buyback, in simple terms, means buying/repurchasing own shares by the company resulting into decrease in share capital of the company. Thus, the shares bought back are cancelled leading reduction in outstanding number of shares.
Share buyback is als... | [
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-0.01982540637254715,
-0.005227675195783377,
0.07059522718191147,
0.031062066555023193,
0.03820066899061203,
0.021945709362626076,
... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 8
RST Ltd. has a capital of ` 10,00,000 in equity shares of ` 100 each. The shares are currently quoted at par. The company proposes to declare a dividend of ` 10 per share at the end of the current financial year. The capitalization rate for the risk class of which the company belon... | [
0.021771389991044998,
0.01824900321662426,
0.004663558676838875,
-0.028149329125881195,
0.050683580338954926,
-0.025145273655653,
0.026650046929717064,
-0.005394377745687962,
-0.03315272182226181,
0.07687117159366608,
0.015069454908370972,
0.018652889877557755,
0.037153713405132294,
0.0071... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
Given,
| Cost of Equity (K e ) | 12% |
|---------------------------------------|----------------|
| Number of shares in the beginning (n) | 10,000 |
| Current Market Price (P 0 ) | ` 100 |
| Net Profit (E) | ` 5... | [
0.020589545369148254,
0.04325588047504425,
-0.014761286787688732,
-0.008732165209949017,
-0.02617928758263588,
-0.034591712057590485,
0.010806196369230747,
0.017575662583112717,
-0.005797354970127344,
0.05974316596984863,
0.027334386482834816,
0.035126943141222,
0.031353775411844254,
0.005... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Calculation of number of shares required for investment
| | ` |
|-------------------------------|---------------------------------|
| Earning | 5,00,000 |
| Dividend distributed | 1,00... | [
0.03507212549448013,
0.015866976231336594,
0.002566911978647113,
0.013040149584412575,
-0.0035190507769584656,
-0.03000999614596367,
0.03764985501766205,
0.02039780654013157,
-0.011570514179766178,
0.05769862234592438,
0.028567392379045486,
0.040802132338285446,
0.012689735740423203,
0.020... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 9
The following information pertains to M/s XY Ltd.
| Earnings of the Company | ` 5,00,000 |
|---------------------------|--------------|
| Dividend Payout ratio | 60% |
| No. of shares outstanding | 1,00,000 |
| Equity capitalization rate | 12% |
|---------... | [
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0.03267712518572807,
0.003774739569053054,
-0.002283219713717699,
-0.02792046032845974,
-0.03930109739303589,
0.03568108007311821,
-0.0014432681491598487,
0.006577872671186924,
0.05354848504066467,
0.002755893860012293,
0.052802473306655884,
0.004792960826307535,
0.03... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
- (i) As per Walter's model:
<!-- formula-not-decoded -->
Where,
P = Market price per share.
E = Earnings per share = ` 5
D = Dividend per share = ` 3
R = Return earned on investment = 15%
Ke = Cost of equity capital = 12%
<!-- formula-not-decoded -->
- (ii) According to Walter's... | [
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0.04506208747625351,
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-0.0030769670847803354,
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0.028633998706936836,
0.02063305303454399,
-0.027136124670505524,
0.0677562952041626,
0.03166637942194939,
0.04417920857667923,
0.012884393334388733,
-0.01... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## DIVIDEND DECISIONS
| | Firm r > K e | Firm r = K e | Firm r < K e |
|-----------------------------------------|----------------|----------------|----------------|
| r (rate of return on retained earnings) | 15% | 10% | 8% ... | [
0.035359665751457214,
0.013476329855620861,
0.001906850258819759,
0.0031624778639525175,
-0.03165331110358238,
-0.035459574311971664,
0.028944695368409157,
0.004964686464518309,
-0.022446608170866966,
0.05596381425857544,
0.007614559028297663,
0.04655497893691063,
0.04304739460349083,
0.01... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Declining Firm
<!-- formula-not-decoded -->
From the above analysis, it can be concluded that:
When r > k, the market value increases with retention ratio.
When r < k, the market value of share stands to decrease.
When r = k, the market value is not affected by dividend policy.
The conc... | [
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0.023368125781416893,
0.0015326435677707195,
-0.020860420539975166,
0.08423898369073868,
0.03097623586654663,
0.010268351063132286,
0.020590417087078094,
-0... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 11
The following information is given below in case of Aditya Ltd.:
Earnings per share = ` 60
Capitalisation rate = 15%
Return on investment = 25%
Dividend payout ratio = 30%
- (i) COMPUTE price per share using Walter's Model.
- (ii) WHAT would be optimum dividend payout ... | [
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0.023618413135409355,
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-0.005709987599402666,
-0.03381616994738579,
0.01854103058576584,
0.018297992646694183,
0.0045073023065924644,
0.06327923387289047,
0.012554316781461239,
0.0094499122351408,
0.005013643763959408,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
- (i) As per Walter's Model, Price per share is computed by using the following formula:
<!-- formula-not-decoded -->
Where,
P = Market Price of the share.
E = Earnings per share.
D = Dividend per share.
Ke = Cost of equity/ rate of capitalization/ discount rate.
r = Internal rate ... | [
0.005786218214780092,
0.021341772750020027,
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0.01641063019633293,
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0.04743007943034172,
0.019697515293955803,
-0.010715018957853317,
0.07129374891519547,
0.03671019524335861,
0.03859075531363487,
0.03256228566169739,
-0.02945... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
Where,
P = Market price per share
D = Dividend per share
E = Earnings per share
m = a multiplier
Further, we studied stock splits as a tool to maintain price range so that it does not move too high to become unaffordable for a wide range of investors. | [
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0.026580773293972015,
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0.03928188234567642,
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0.08051057159900665,
0.026181276887655258,
0.03487991541624069,
0.021697036921977997,
-0.01... |
Inter_P6A_FM_Mod2_Chapter_8_Dividend_Decision.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SUMMARY
Dividend decision is one of the most important areas of management decisions. It is easy to understand but difficult to implement. Generally, the dividend can be in the form of Cash Dividend and Stock Dividend .
Dividend policy is generally governed by long term financing decision and we... | [
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0.06925296038389206,
0.004021089524030685,
0.013796248473227024,
0.03903254494071007,
-... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## LEARNING OUTCOMES
- Understanding the meaning, need and importance of working capital for smooth functioning of an entity.
- Understanding the factors which determine the working capital.
- Learning the methods of estimating working capital.
- Understanding the various components of w... | [
0.020082814618945122,
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0.03601715713739395,
0.0322309210896492,
0.025532763451337814,
-0.... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## This chapter is Divided into Six Units:
UNIT I: Introduction to Working Capital Management
UNIT II: Treasury and Cash Management
UNIT III: Management of Inventory
UNIT IV: Management of Receivables
UNIT V: Management of Payables
UNIT VI: Financing of Working Capital
<!-- image -->
1.
a | [
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0.058045268058776855,
0.02316969819366932,
-0.... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## MEANING AND CONCEPT OF WORKING CAPITAL
In accounting terms, working capital is defined as the difference between current assets and current liabilities. If we break down the components of working capital, we will find working capital as follows:
Working Capital = Current Assets -Current Liabi... | [
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0.07497566938400269,
0.04136931151151657,
0.023448072373867035,
0.01757916621863842,
-0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
- (ii) It is settled either by the use of current assets or by creation of new current liability.
For the purpose of working capital management, current liabilities of an entity can be grouped into the following categories:
- (a) Payable (trade payables and bills payables)
-... | [
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0.06424760818481445,
0.04163952171802521,
0.018518559634685516,
0.029405390843749046,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## MANAGEMENT OF WORKING CAPITAL
a
A positive working capital indicates the company's ability to pay its short -term liabilities. On the other hand, a negative working capital shows inability of an entity to meet its short-term obligations.
- (b) Time: From the point of view of time, wor... | [
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0.0687323808670044,
0.03307272493839264,
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0.013126421719789505,
-0.02... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 2.1 Importance of Adequate Working Capital
Management of working capital is an essential task of the finance manager. He has to ensure that the amount of working capital available is neither too large nor too small for its requirements.
A large amount of working capital would mean that the comp... | [
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0.03278570622205734,
0.06299303472042084,
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-0.013... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 2.2 Optimum Working Capital
If a company's current assets do not exceed its current liabilities, then it may run into trouble with creditors that want their money quickly. Not being able to meet its short-term obligations, company shall eventually lose its reputation and not many vendor... | [
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0.05679946765303612,
0.036082472652196884,
-0.014764819294214249,
0.017731307074427605,
-0.... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 3. DETERMINANTS OF WORKING CAPITAL
Working capital management is concerned with:
- (a) Maintaining adequate working capital (managing the level of individual current assets and the current liabilities) and
- (b) Financing of the working capital.
For the point a) above, a Finance Manager n... | [
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0.050502512603998184,
0.03530643507838249,
0.007494458928704262,
0.004244186915457249,
-0.... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## MANAGEMENT OF WORKING CAPITAL
a
<!-- image -->
1. Need for Cash: Identify the cash balance which allows for the business to meet day-to-day expenses but reduces cash holding costs (example - loss of interest on long term investment had the surplus cash invested therein).
2. Desired level of Inve... | [
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0.07936941832304001,
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0.007433724589645863,
-0.03... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
4. Short-term Financing Options: Inventory is ideally financed by credit granted by the supplier. However, depending on the cash conversion cycle, it may be necessary to utilize a bank loan (or overdraft), or to 'convert debtors to cash' through 'factoring' in order to ... | [
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0.08639340102672577,
0.032306741923093796,
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0.010015230625867844,
-0.0319... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4. MANAGEMENT OF WORKING CAPITAL
The importance of working capital for an entity can be compared to importance of life blood for a living body or of a lubricant/ fuel for an engine. Working capital is required for smooth functioning of the business of an entity as lack of this may interrupt the ... | [
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-0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4.1 Liquidity and Profitability
For uninterrupted and smooth functioning of the day-to-day business of an entity, it is important to maintain liquidity of funds evenly. As we have already learnt in previous chapters that each rupee of capital bears some cost. So, while maintaining liquidity the c... | [
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0.01111223641782999,
-... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
| Pre-payment of expenses | Reduces uncertainty and profitable in inflationary environment. | Cost-benefit analysis required | Improves or maintains liquidity. ... | [
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-0.... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4.2 Investment and Financing
Working capital policy is a function of two decisions, first is investment in working capital and the second is financing of the investment. Investment in working capital is concerned with the level of investment in the current assets. It gives the answer of 'How m... | [
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... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4.3 Approaches of working capital investment
Based on the organisational policy and risk-return trade off, working capital investment decisions are categorised into three approaches i.e. aggressive, conservative and moderate.
<!-- image -->
- (a) Aggressive: Here investment in... | [
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0.011802194640040398,
... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 4.4 Current Assets to Fixed Assets Ratio
The finance manager is required to determine the optimum level of current assets so that the shareholders' value is maximized.
A firm needs both fixed and current assets to support a particular level of output.
As the firm's output and sales increases, th... | [
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0.00445095868781209,
-0.00... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 1
A firm has the following data for the year ending 31 st March, 2022:
| | ( ` ) |
|------------------------------------|-----------|
| Sales (1,00,000 @ ` 20) | 20,00,000 |
| Earnings before Interest and Taxes | 2,00,000 |
| Fixed A... | [
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0.039760734885931015,
-0.00... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Effect of Alternative Current Assets Policies
| | Conservative ( ` ) | Moderate ( ` ) | Aggressive ( ` ) |
|---------------------------------------------|----------------------|------------------|--------------------|
| Sales ... | [
-0.0022437290754169226,
0.03162787854671478,
-0.000681159901432693,
0.013661550357937813,
-0.04101007804274559,
-0.023945016786456108,
0.017506461590528488,
0.0021020316053181887,
-0.012830697000026703,
0.05050588399171829,
0.027331218123435974,
0.009914555586874485,
0.01600729487836361,
-... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 5. ESTIMATING WORKING CAPITAL NEEDS
Operating cycle is one of the most reliable methods of Computation of Working Capital.
However, other methods like ratio of sales and ratio of fixed investment may also be used to determine the Working Capital requirements. These methods are briefly explained a... | [
0.03445687144994736,
0.03035990707576275,
0.012385238893330097,
-0.005938771180808544,
-0.002126014791429043,
-0.029633015394210815,
0.013911736197769642,
-0.011442048475146294,
0.03273843601346016,
0.03724489361047745,
0.0346531979739666,
-0.00748597364872694,
0.0010548457503318787,
-0.03... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## MANAGEMENT OF WORKING CAPITAL
a
- (i) Current Assets Holding Period: To estimate working capital needs based on the average holding period of current assets and relating them to costs based on the company's experience in the previous year. This method is essentially based on the Oper... | [
0.027987608686089516,
0.01809033378958702,
-0.0006451289518736303,
-0.011926507577300072,
-0.008783029392361641,
-0.01898193173110485,
0.01412662211805582,
-0.00819055549800396,
-0.014736571349203587,
0.04248988628387451,
0.0183241069316864,
-0.0008214107365347445,
0.004348911810666323,
-0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6. OPERATING OR WORKING CAPITAL CYCLE
A useful tool for managing working capital is the operating cycle.
The operating cycle analyses the accounts receivable, inventory and accounts payable cycles in terms of number of days. For example:
- Accounts receivables are analyzed by the avera... | [
0.0008946319576352835,
0.021800121292471886,
-0.0027801012620329857,
-0.01792944222688675,
0.008431097492575645,
-0.024631904438138008,
-0.0034297576639801264,
-0.020414281636476517,
0.03075154684484005,
0.07463975995779037,
0.03400301933288574,
0.021217094734311104,
-0.016525108367204666,
... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Operating/Working Capital Cycle Definition
Working Capital cycle indicates the length of time between a company's paying for materials, entering into stock and receiving the cash from sales of finished goods. It can be determined by adding the number of days required for each stage in the
a
cycl... | [
0.02122916281223297,
0.027980757877230644,
0.0008708852110430598,
0.018509626388549805,
0.01458181906491518,
-0.04801396280527115,
0.012987236492335796,
-0.02101343683898449,
-0.011859542690217495,
0.07089174538850784,
0.034984368830919266,
0.006802612915635109,
0.02211974561214447,
-0.050... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Where,
R = Raw material storage period
W = Work-in-progress inventory * holding period
F = Finished goods storage period
D = Receivables (Debtors) collection period
C = Credit period allowed by suppliers (Creditors)
* work in progress inventory may also be termed as works cost. | [
-0.0313907116651535,
0.010180705226957798,
-0.00971749797463417,
0.0007153887418098748,
-0.012918459251523018,
-0.013774708844721317,
0.03396804630756378,
-0.027627648785710335,
-0.0018663745140656829,
0.054413966834545135,
0.020925261080265045,
0.02230399288237095,
0.03723594918847084,
-0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## MANAGEMENT OF WORKING CAPITAL
a
increased credit limit; you are effectively creating free finance to help fund future sales.
| If you……………… | Then …………………. |
|---------------------------------------------------------------... | [
0.03275509551167488,
0.039999548345804214,
0.013337837532162666,
0.03626657649874687,
-0.024254387244582176,
-0.04248365759849548,
0.011221869848668575,
-0.01292069535702467,
-0.011548511683940887,
0.0731511116027832,
0.04872079938650131,
-0.0008865285199135542,
0.005534524563699961,
-0.03... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## The various components of Operating Cycle may be calculated as shown below:
| (1) | Raw Material Storage Period | Average stockof raw material AverageCostof Raw Material Consumption perday = |
|-------|------------------------------------------------|--------------... | [
-0.012676398269832134,
0.00256158085539937,
0.005548940505832434,
-0.01609119586646557,
-0.02543836273252964,
-0.03100735880434513,
0.002018979750573635,
-0.022199038416147232,
0.019103670492768288,
0.05796954035758972,
0.03478173911571503,
0.00950260553508997,
0.03328918665647507,
-0.0258... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6.1 Working Capital Based on Operating Cycle
One of the methods for forecasting working capital requirement is based on the concept of operating cycle. The calculation of operating cycle and the formula for estimating working capital on its basis has been demonstrated with the help o... | [
0.01735607720911503,
0.003724915673956275,
0.0029817859176546335,
-0.03512313589453697,
0.009080839343369007,
-0.02842024900019169,
0.002294974634423852,
-0.018953591585159302,
-0.0007302510784938931,
0.06482534110546112,
0.05442238971590996,
-0.008908660151064396,
0.005366933532059193,
-0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## MANAGEMENT OF WORKING CAPITAL
a
( ` )
| | | ( ` ) |
|--------|-------------------------------------------------|----------|
| (i) | Raw material inventory consumed during the year | 6,00,000 |
| (ii) | Average stock of raw material ... | [
0.02541700191795826,
0.008347921073436737,
0.011783501133322716,
0.0238852147012949,
-0.011537563987076283,
-0.03925357758998871,
0.022744370624423027,
-0.023258671164512634,
-0.002132796449586749,
0.07289905101060867,
0.03735148534178734,
0.012398390099406242,
0.03503533825278282,
-0.0211... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## (a) Calculation of Net Operating Cycle period of XYZ Ltd.
Raw Material storage period (R)=
Average stockof raw material
Average Cost of Raw Material Consumption perday
<!-- formula-not-decoded -->
<!-- formula-not-decoded -->
Work-in-progress inventory holding period (W)
<!-- formula-not-de... | [
-0.012740695849061012,
0.014939574524760246,
0.016611376777291298,
-0.008441058918833733,
-0.016851097345352173,
-0.04326996952295303,
0.01477345172315836,
0.0008493380155414343,
-0.015003168024122715,
0.08133756369352341,
0.033111922442913055,
0.020005539059638977,
0.04164543002843857,
-0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6.2 Estimation of amount of Different Components of Current Assets and Current Liabilities
The various constituents of current assets and current liabilities have a direct bearing on the computation of working capital and the operating cycle. The holding period of various constit... | [
0.0055541968904435635,
-0.0005990482168272138,
-0.018928172066807747,
-0.01104581356048584,
0.020155802369117737,
-0.008050781674683094,
-0.0032545351423323154,
-0.033791087567806244,
0.0395108126103878,
0.051026567816734314,
0.04391011595726013,
-0.01967550814151764,
0.0018778389785438776,
... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Estimation of Current Assets
The estimates of various components of gross working capital or current assets may be made as follows:
- (i) Raw Materials Inventory: The funds to be invested in raw materials inventory may be estimated on the basis of production budget, the estimated cost pe... | [
-0.030214522033929825,
0.009581701830029488,
-0.031323373317718506,
-0.01366087794303894,
0.009896780364215374,
-0.021988283842802048,
0.03945997729897499,
-0.020627716556191444,
0.02505936287343502,
0.04430451616644859,
0.06263826042413712,
0.022078100591897964,
0.012042911723256111,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## MANAGEMENT OF WORKING CAPITAL
a
Estimated Production (units) Estimated cost per unit x Average raw material storage period 12months/365days* x
- (ii) Work-in-Progress Inventory: The funds to be invested in work-in-progress can be estimated by the following formula:
x Estimated Production(units)... | [
0.00475772749632597,
0.03586602210998535,
-0.0031437138095498085,
-0.0178233552724123,
0.011651379056274891,
-0.02069144695997238,
0.03540372475981712,
-0.01387733593583107,
0.008272192440927029,
0.05431605502963066,
0.03326410427689552,
0.022790919989347458,
0.015606752596795559,
-0.01331... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Estimation of Current Liabilities
Current liabilities are deducted from the current assets to get working capital. Hence, the amount of working capital is lowered to the extent of current liabilities (other than bank credit) arising in the normal course of business. The important curren... | [
0.008583352901041508,
0.014691178686916828,
-0.03737718239426613,
0.0041440874338150024,
-0.012848307378590107,
-0.029006795957684517,
0.02536800503730774,
-0.01271070446819067,
0.03589769825339317,
0.04390165954828262,
0.05373874306678772,
0.014293544925749302,
0.035827409476041794,
-0.01... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
Estimated credit purchase 12months/365days* × Credit period allowed by suppliers
- (ii) Direct Wages: It is estimated with the help of direct wages budget by using following formula:
Estimated labour hours×wages rate perhour 12months/365days* × Average time lag in payment of... | [
0.012348290532827377,
0.008233806118369102,
-0.017267929390072823,
-0.016672777011990547,
-0.016587646678090096,
-0.007024558261036873,
0.014186019077897072,
-0.01481675449758768,
0.028853394091129303,
0.05624142289161682,
0.03108539991080761,
0.014720304869115353,
0.024903036653995514,
-0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Estimation of Working Capital Requirements
| | | Amount (`) | Amount (`) | Amount (`) |
|-----|-----------------------|--------------|--------------|--------------|
| I. | Current Assets: | | | |
| | Inventories: ... | [
0.03647225350141525,
-0.004480843432247639,
0.0055101653560996056,
0.023005075752735138,
-0.017316298559308052,
-0.03174016252160072,
0.01646886020898819,
-0.0025394847616553307,
0.005296770017594099,
0.05555136501789093,
0.05388660728931427,
0.008487027138471603,
0.01931903325021267,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## MANAGEMENT OF WORKING CAPITAL
a
| | Bills Payables | --- | |
|------|------------------------------------------------------------|-------|-----|
| | Wages Payables | --- | |
| | Paya... | [
0.038958579301834106,
0.012098707258701324,
-0.017830273136496544,
0.015350491739809513,
-0.002067481866106391,
-0.05793558806180954,
0.0066352346912026405,
-0.005907687358558178,
0.00925036333501339,
0.04793873801827431,
0.05536133795976639,
0.029629075899720192,
0.03193189948797226,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 3
On 1 st January, the Managing Director of Naureen Ltd. wishes to know the amount of working capital that will be required during the year. From the following information, PREPARE the working capital requirements forecast.
Production during the previous year was 60,00... | [
-0.010196775197982788,
0.037151988595724106,
-0.007098950911313295,
-0.022327840328216553,
-0.016768889501690865,
-0.03408519923686981,
0.012633969075977802,
-0.009611993096768856,
-0.018070606514811516,
0.05267004668712616,
0.0500108040869236,
0.012615368701517582,
0.016535963863134384,
-... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Working Notes:
1. Raw material inventory: The cost of materials for the whole year is 60% of the Sales value.
Hence it is 60,000 units × ` 5 × ` 60 = 1,80,000 100 . The monthly consumption of raw material would be ` 15,000. Raw material requirements would be for two months; hence raw materials ... | [
0.002706842729821801,
0.019810892641544342,
-0.004904305562376976,
0.00745663745328784,
-0.05771404132246971,
-0.018944639712572098,
0.0010256413370370865,
0.010163453407585621,
0.004063830245286226,
0.07360022515058517,
0.02432028204202652,
0.021356455981731415,
0.038151249289512634,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Statement of Working Capital Required
| | ( ` ) | ( ` ) |
|----------------------------------------------------|---------|---------|
| Current Assets or Gross Working Capital: | | |
| Raw materials inventory (Refer to... | [
0.015863357111811638,
-0.0063222553580999374,
-0.005684919189661741,
0.03128799423575401,
-0.015979215502738953,
-0.03146357461810112,
0.03957465663552284,
-0.020779024809598923,
0.004951957613229752,
0.0702742487192154,
0.038458798080682755,
0.022990727797150612,
0.031192855909466743,
-0.... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6.3 Working Capital Requirement Estimation based on Cash Cost
We have already seen that working capital is the difference between current assets and current liabilities. To estimate requirements of working capital, we have to forecast the amount required for each item of current a... | [
-0.004037914797663689,
0.03707806393504143,
-0.009648903273046017,
-0.025329934433102608,
0.008845766074955463,
-0.0339653417468071,
0.022941330447793007,
-0.012776666320860386,
-0.016077514737844467,
0.04683484882116318,
0.0376509390771389,
0.02397310920059681,
0.015323692932724953,
-0.02... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 4
The following annual figures relate to XYZ Co.:
| | ( ` ) |
|------------------------------------------------------------------|-----------|
| Sales (at two months' credit) | 36,... | [
0.020104555413126945,
0.023500986397266388,
0.015970807522535324,
-0.0062911477871239185,
0.0004983788239769638,
-0.024318240582942963,
0.02279394119977951,
0.012990946881473064,
-0.0011185207404196262,
0.04987822100520134,
0.03334420546889305,
0.02187425270676613,
0.020632630214095116,
-0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Statement of Working Capital requirements (cash cost basis)
| | ( ` ) | ( ` ) |
|------------------------------------------------------------------------------------|----------|---------|
| A. Current Assets ... | [
0.014593123458325863,
-0.002861387562006712,
0.02977144904434681,
0.007007263600826263,
-0.006504775024950504,
-0.02563374675810337,
0.01702740788459778,
-0.011468548327684402,
0.00032772860140539706,
0.04718782380223274,
0.044849611818790436,
0.01912195049226284,
0.01962169259786606,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
| Cash balance | 1,00,000 | 9,10,000 |
|------------------------------------------------------------------------------|------------|------------|
| Gross Working Capital ... | [
0.035491038113832474,
0.008464173413813114,
-0.004028757568448782,
0.024298595264554024,
-0.026504475623369217,
-0.02921564131975174,
0.03695756569504738,
-0.009380853734910488,
-0.006781551521271467,
0.054974742233753204,
0.039032161235809326,
0.022782517597079277,
0.01632087118923664,
-0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Working Notes:
| (i) | Computation of Annual Cash Cost of Production | ( ` ) |
|-------|-------------------------------------------------|-----------|
| | Material consumed | 9,00,000 |
| | Wages | 7,20,00... | [
0.018795574083924294,
0.02842009998857975,
0.0013150189770385623,
0.0017434030305594206,
-0.016561424359679222,
-0.019094480201601982,
0.003863012418150902,
0.004730456508696079,
-0.017783651128411293,
0.04970299452543259,
0.033843085169792175,
0.014941931702196598,
0.02857319824397564,
-0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 6.4 Effect of Double Shift Working on Working Capital Requirements
The greatest economy in introducing double shift is the greater utilization of fixed assets. Although production increases, little or very marginal funds may be required for additional assets.
But increase in the number of... | [
0.022657344117760658,
0.0399964265525341,
-0.014773787930607796,
0.00302646541967988,
-0.02175161801278591,
-0.04280568286776543,
-0.008148865774273872,
0.0016923699295148253,
-0.03307410329580307,
0.08401013165712357,
0.02879602462053299,
0.016905974596738815,
0.03524096682667732,
-0.0551... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## ILLUSTRATION 5
Samreen Enterprises has been operating its manufacturing facilities till 31.3.2022 on a single shift working with the following cost structure:
| | Per unit ( ` ) |
|------------------------------------|-------------------------... | [
0.0076221199706196785,
0.03413986414670944,
-0.041112616658210754,
0.00920831598341465,
-0.01185053400695324,
-0.025345033034682274,
-0.005134750157594681,
0.002586513990536332,
-0.027317803353071213,
0.040060218423604965,
0.030111828818917274,
0.01664144918322563,
0.017338689416646957,
0.... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## SOLUTION
This question can be solved using two approaches:
- (i) To assess the impact of double shift for long term as a matter of production policy.
- (ii) To assess the impact of double shift to mitigate the immediate demand for next year only.
The first approach is more appropriate and fulfil... | [
0.018232230097055435,
0.032601963728666306,
-0.048565953969955444,
0.009284848347306252,
-0.0450974740087986,
-0.018902217969298363,
0.0001841782359406352,
0.036115050315856934,
-0.013891010545194149,
0.07124631851911545,
-0.019301151856780052,
-0.0025252753403037786,
0.026165645569562912,
... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## (i) Assessment of impact of double shift for long term as a matter of production policy:
Comparative Statement of Working Capital Requirement
| | Single Shift (24,000) | Single Shift (24,000) | Single Shift (24,000) | Double Shift (48,000) | Double Shift (48,000... | [
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0.05449969694018364,
0.029108067974448204,
0.00989463459700346,
0.0397680290043354,
-0.0359... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Workings:
- (1) Statement of cost at single shift and double shift working
| | 24,000 units | 24,000 units | 48,000 Units | 48,000 Units |
|----------------------|----------------|----------------|----------------|----------------|
| | Per unit ( ... | [
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0.05965060368180275,
0.024493005126714706,
0.04903880134224892,
0.03824229538440704,
-0.026... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## FINANCIAL MANAGEMENT
- (2) Sales in units 2020-21= Sales Unit selling price 4,32,000 = =24,000 units 18 ` `
- (3) Stock of Raw Materials in units on 31.3.2021
<!-- formula-not-decoded -->
- (4) Stock of work-in-progress in units on 31.3.2021
<!-- formula-not-decoded -->
- (5) Stock of finished... | [
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0.0755341649055481,
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0.026105772703886032,
0.03452921658754349,
-0.0048... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Workings:
- (6) Calculation of no. of units to be sold:
- (7) Calculation of Material to be consumed and materials to be purchased in units:
| No. of units to be Produced | 48,000 |
|---------------------------------------|----------|
| Add: Opening stock of finished goods | 4,500 ... | [
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0.068074531853199,
0.02247007191181183,
0.04614383354783058,
0.030690697953104973,
0.00198... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Comparative Statement of Working Capital Requirement
| | Single Shift (Current Year - 24,000 units) | Single Shift (Current Year - 24,000 units) | Single Shift (Current Year - 24,000 units) | Double Shift (Next Year - 48,000 units) | Double Shift (Next Year -... | [
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-0.004751788452267647,
0.04781821370124817,
0.033729370683431625,
0.0012527499347925186,
0.030533157289028168,... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Notes:
- (i) The quantity of material in process will not change due to double shift working since work started in the first shift will be completed in the second shift.
- (ii) It is given in the question that the WIP is valued at prime cost hence, it is assumed that the WIP is 100% co... | [
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0.052263565361499786,
-0.0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 7. TREASURY MANAGEMENT: MEANING
In the wake of the competitive business environment resulting from the liberalization of the economy, there is a pressure to manage cash scientifically. The demand for funds for expansions coupled with high interest rates, foreign exchange volatility and the g... | [
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0.03737899661064148,
0.06070101633667946,
0.007608088664710522,
0.011455437168478966,
0.0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 8. FUNCTIONS OF TREASURY DEPARTMENT
The treasury department have evolved in importance over number of years from being responsible for only cash handling issues to technical areas revolving around hedging forex risks, composition of capital structure etc. The fundamental tasks for which treasury d... | [
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0.03628963977098465,
0.04026974365115166,
-0.01214649062603712,
-0.003599787363782525,
0... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 9. MANAGEMENT OF CASH
Management of cash is an important function of the finance manager. It is concerned with the managing of:
- (i) Cash flows into and out of the firm;
- (ii) Cash flows within the firm; and
- (iii) Cash balances held by the firm at a point of time by ... | [
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0.049124639481306076,
0.001761781983077526,
0.05108452960848808,
-0.01158891525119543,
0.... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 9.1 The Need for Cash
The following are three basic considerations in determining the amount of cash or liquidity as have been outlined by Lord Keynes, a British Economist:
- Transaction need: Cash facilitates the meeting of the day-to-day expenses and other debt payments. Normally, inflows of ... | [
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0.00523545453324914,
0.00... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 9.2 Cash Planning
Cash Planning is a technique to plan and control the use of cash. This protects the financial conditions of the firm by developing a projected cash statement from a forecast of expected cash inflows and outflows for a given period. This may be done periodically either on d... | [
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0.006834926549345255,
0.03730667009949684,
-0.001... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 9.3 Cash Budget
Cash Budget is the most significant device to plan for and control cash receipts and payments. This represents cash requirements of business during the budget period.
The various purposes of cash budgets are:-
- Coordinate the timings of cash needs. It identifies the period(s) ... | [
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0.049942001700401306,
0.... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf | FM | Study_Material | N/A | [Concept: Theory]
## Main Components of Cash Budget
Preparation of cash budget involves the following steps:-
- (a) Selection of the period of time to be covered by the budget. It also defines the planning horizon.
- (b) Selection of factors that have a bearing on cash flows. The factors that generate cas... | [
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0.038146011531353,
-0.... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 10. METHODS OF CASH FLOW BUDGETING
A cash budget can be prepared in the following ways:
1. Receipts and Payments Method: In this method all the expected receipts and payments for budget period are considered. All the cash inflow and outflow of all functional budgets including capital exp... | [
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0.041358403861522675,
0.... |
Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf | FM | Study_Material | N/A | [Concept: Theory]
## 10.1 Cash budget for short period
Preparation of cash budget month by month would require the following estimates:
- (a) As regards receipts:
1. Receipts from debtors;
2. Cash Sales; and
3. Any other source of receipts of cash (say, dividend from a subsidiary company)
- (b) As regards payments:
... | [
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... |
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